Notes & updates: None currently.

What to Expect: A Chronology for Buying a Business

Purchasing a business is different than buying a piece of real estate or a piece of equipment. Researching and purchasing a profitable business can be a genuine challenge. The process can take months. The process can dominate a buyer’s time. The framework—the timeline—for buying a business is not intuitive. The most people have not and never will buy a business in their entire lives.

Criteria for Buying a Business

To begin, the entrepreneur should detail his or her desires into a comprehensive outline that states what the goals are. The goals should drive the search for the right business. The outline should answer questions: the type of service provided or product manufactured, the desired income, the location of the business, et cetera. The prospective buyer should also decide what he or she can afford to spend on a business. How much a buyer can spend will depend on the source of the money. The new owner can finance it personally or seek funding from a bank loan. In the planning stages, the buyer must consider the amount of risk he or she is willing and able to accept. And the buyer should understand the commitment required to run the business—especially at the commencement of operations.

Locating Businesses for Sale

Entrepreneurs often find businesses for sale by checking the ads in newspapers and trade magazines, making use of their networks, and engaging the services of a business broker. If a buyer hires a broker, the broker should review several businesses that fulfill the buyer’s criteria and financial qualifications. A buyer not employing a business broker should to research the companies he or she has identified through company and third-party publications, filings they have made, and discussions with the owners. Business brokers charge a fee that is normally a percentage of the sale price. Buyers sometimes pay a broker’s fee, but it is common for sellers to pay.

Meeting Business Owners and Touring Businesses

Once a short list of prospective businesses has been created, the buyer or the broker should begin scheduling appointments with business owners to visit the facilities and operations. The owners will probably ask that meetings are held outside of business hours to prevent premature disclosure of the potential sale to customers and employees. The buyer and seller should discuss a variety of topics about the business during various stages of negotiation, including the basis for determining the value of the business and the terms of the sale. This information should be considered confidential, even if it is not legally confidential, and should not be disclosed by the buyer to anyone other than perhaps the buyer’s advisors and spouse. Based on the buyer’s expectations, the buyer may wish to be accompanied by an attorney to facilitate the discussion of key matters and to help complete an earnest money agreement and begin the due diligence process.

Due Diligence and Making an Offer

Due diligence is a comprehensive analysis of the business’s past and forecasted performance, current assets and liabilities, personnel, and other details. Due diligence can be time-consuming and expensive. Fees for advisors, copying documents, conducting lien searches, and creating closing documentation can accumulate quickly. Due diligence is not a cost-effective process unless the buyer seriously willing to buy and the seller seriously willing to sell. Performing a due diligence analysis is not in either party’s best interests unless the buyer and seller are definitely ready to deal. Before the due diligence begins, an earnest money agreement must be executed.

The agreement should provide the terms and conditions the buyer and seller mutually agree will drive the transaction. The amount of earnest money depends on the transaction price. The amount should be high enough to evidence the buyer’s intentions and to encourage the seller remove the business from the market for fifteen (15) to thirty (30) days, or more, while due diligence is completed. A typical earnest money amount for small- to mid-sized businesses might be $5,000 to $10,000.

If a business broker has been involved, he or she should direct document requests and meetings between the advisors, landlord, lenders, and any other relevant parties.

Closing and Transfer

When due diligence is concluded and the buyer is comfortable with the state of the business, the buyer should allow an escrow officer to perform lien searches and draft final closing documents, such as a bill of sale, note and security agreement, closing statements, non-competition agreements, leases, and approvals from various parties. When the buyer and seller have approved the closing documents, they should schedule a closing. On the closing date, the buyer will present a cashier’s check for the full amount due.

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